A Recession Appears Imminent

In January, I wrote that I expected a recession in 2012 and I followed up in the first half of this year reiterating that expectation in several columns. It didn't happen -- which I wrote about in September. I cautioned that a recession may occur in 2013 and I promised to revisit the issue, so let's have a look.

There are indications again of a recessionary trajectory, which will be more evident by the end of the first quarter of 2013. I am very cautious about this call, however, because I still can't figure out why the traditional recession indicators that became apparent in the third quarter 2011 reversed their trajectory during the first half of 2012 -- though "reversed" is a bit too strong of a word.

The principal issue is retail sales. During the first half of 2012, the rate of increase in real private final sales decreased but at a slower rate than anticipated from the trend dating back to summer 2011. I have not been able to figure out why this occurred, so I am cautious about the future.

Recessions generally form when the rate of growth in real private final sales decelerates. Once the rate of growth goes below 2.5% year over year, the recessionary trajectory is strong enough to ensure that sales will fall into real contraction over the next calendar quarter. This is the trajectory we were on beginning in the summer of 2011. For some reason, though, the rate of deceleration in the rate of growth slowed so that the rate of growth during most of 2012 stayed above the 3% level. The rate of growth in real private final sales is now decelerating more quickly again and is at about 2.5% year over year.

There have been two instances of this in the past 50 years without a recession also happening: once in the mid-1960s and again in the mid-1980s. There have been eight recessions since then with this level occurring close to simultaneously with each. Put another way: In the past 50 years, this has happened 10 times, with eight signaling the beginning of a recession and in all eight, the level of real private final sales almost always accelerated rapidly within a few months into an outright contraction. Recessions, however, aren't evident or widely discussed in the financial media until months after this has occurred, and the National Bureau of Economic Research won't officially proclaim one until long after that.

The fact that this is occurring simultaneously with federal budget issues (which few outside of the private sector in the Washington metro area consider a real and immediate economic issue) indicates that the decline into an outright contraction in real private final sales could come as early as January 2013.